Cryptocurrency will be given a legal framework
Ukrainian players of the cryptocurrency market can come out of the shadow. Parliamentarians have proposed already two draft laws on legalization of cryptocurrencies and mining. The documents contain some 'carrots' for miners, like cheap electricity and low taxes, but also 'sticks' for the market players – there will be less anonymity and more government control.

The road to mining

Financial regulators are backpedaling regulation of cryptocurrencies and mining, which is why the parliament has taken over the initiative. Mere days apart, MPs introduced two draft laws to the parliament that would help legalize transactions with bitcoin and other cryptocurrencies in Ukraine.

Financial Stability Council is expected to shortly regulate the status of cryptocurrencies in Ukraine. However, Minister of Finance Oleksandr Danylyuk says the regulators are still studying 'the nature of cryptocurrencies'. Head of the National Securities and Stock Market Commission (NSSMC) tells FinClub that it is critical not to allow cryptocurrency fraud within the framework of bitcoin regulation. Meanwhile, the NBU admitted they don't know how to react to the new phenomenon exactly, which is why it is sticking to the 'wait&see' position, while bitcoin is most certainly not a currency or a means of payment in the very least.

Cryptocurrency is a programming code (a set of symbols, digits and letters) that is property and can be used as a means of exchange, according to the Draft Law No. 7183 On Cryptocurrency Circulation in Ukraine that was introduced by MPs from Narodniy Front and Petro Poroshenko Bloc. Everybody will be able to mine cryptocurrency, but only if they pay taxes. A similar approach is used by Australia and Venezuela, where cryptocurrencies were recognized as 'property' and also EU, where cryptocurrencies are defined as a 'means of exchange' for the moment.

The National Bank will be controlling cryptocurrency circulation, regulating operations on the cryptocurrency exchanges. At these exchanges, investors will be able to convert programming codes into assets. The government, however, will include a 'disclaimer' in the law that it does not guarantee cryptocurrency value or activity of online cryptocurrency exchange services. At that, cryptocurrency transactions will become transparent for the authorities thanks to blockchain. "All data on cryptocurrency transactions is stored in the general access of blockchain system, which is decentralized. This will provide great opportunities for regulation on the part of the state and will not create any problems, as with regulation of circulation of cash transactions," reads the explanatory note to the draft law.

The draft law No. 7183-1 introduced by VR Financial Policy and Banking Committee Chair Serhii Rybalka proposes to recognize cryptocurrency as a 'financial asset'. "There is no sense in reinventing the wheel and new rules for it. The model of adjusting cryptocurrencies to the existing legislation is the most effective one. That is why we propose to recognize cryptocurrency as a financial asset. This chapter of legislation is most suitable for introducing cryptocurrency to the legal framework," he believes. This approach resembles Japan's experience, which views cryptocurrencies as a value, similar to assets.

The draft law On Stimulating Cryptocurrency and Derivatives Market in Ukraine envisages reduced rates for electricity and maximum simplified taxation with the purpose of stimulating mining and circulation of cryptocurrencies. The MP offers not to impose taxes on investments into cryptocurrency, but only charge 2% fee to the Pension Fund 'at the exit', i.e. for reverse conversion of any cryptocurrency into hryvnia.

It's been proposed that the National Financial Services Commission is assigned to be the key cryptocurrency regulator. Serhii Rybalka has thus shown that he does not believe in the ability of the parliament to pass the law on splitting functions of the NFSC between the NSSMC and the NBU. The draw law, however, also envisages work for NSSMC: the commission is set to regulate emission, circulation and accounting of derivatives for the cryptocurrency.

Draft laws drawn in a hurry

The future regulators of bitcoin and other cryptocurrency markets refused to comment on the draft laws, claiming they needed to study and analyze them thoroughly. «We are studying the draft law and forming NBU's position in its regard," FinClub was told at the NBU's press service.

Representatives of Bitcoin Foundation Ukraine pointed that the 'draw laws were very raw and contained populist component'. "Defining cryptocurrency as a programming code, which is intellectual property, puts it in the same row with a painting or a poem, which are also viewed as intellectual property. This is an extremely disputable issue, as there should have then been provisions on the possibility of royalty payments and the term of copyright protection," BFU statement reads. They are also very dissatisfied with the provision requiring to 'store data of past transactions for 5 years, somehow protect cryptocurrency and be responsible for the integrity of blockchain system', which is technologically impossible, and also with the impossibility to use the programming code for 'exchange'.

The Draft Law No. 7183 determines NBU as the cryptocurrency market regulator. "At the same time, cryptocurrency transactions are determined as barter. The question is then why a financial regulator is being involved in the regulation of civil-legal relations (barter)," says BFU. They also have complaints about the second draft law: the requirement to trade cryptocurrencies via a financial broker and 'declarative statements on stimulating mining'. Both draft laws have no mentions of ICO and do not have any relation to the possibility of holding it in Ukraine, according to the detailed analysis of the draft laws. Juscutum law firm, involved in the analysis of the draft laws, has declared that it accepted bitcoins as payment for their services since 2012, but refused to give commentary to FinClub.

Regulation is inevitable

Interest of people's deputies towards cryptocurrencies is logical. "Appearance of such document in any case does not mean that the work was done in vain. The sphere is popular and it needs to be studied and developed," believes Oleksandr Matsapura, junior lawyer at Investment Service Ukraine. "The key positive thing is that cryptocurrency is directly recognized as the object of ownership right and the general norms on private property right apply to it. This means that owners of cryptocurrency can defend their rights in court, which is quite problematic at the moment. There are rulings in the Ukrainian judicial practice, where courts argued that bitcoin as a subject of an agreement cannot be identified, determine its properties as an object of material world and therefore such object cannot be a subject of judicial protection," says Oleksandr Vyhovskiy, a lawyer at Ilyashev & Partners.

However, both document reject one of the key ideas of cryptocurrencies, namely existence outside a state. "Cryptocurrency has been primarily considered a means that lets you get rid of the obtrusive state control. Meanwhile, the draft law envisages that the state controls everything. Furthermore, if the state is willing to be responsible for cryptocurrency circulation, the state should provide at least some guarantees. The draft laws, however, exclude state guarantees," says Matsapura.

Cryptocurrency transactions will seize being anonymous, which goes against the principles of cryptocurrency supporters. "Looking at the world experience, in order to start trading at a cryptocurrency exchange, you need to verify the account in many countries, for which you need to provide personal data and copies of documents. In their turn, exchange initiators must obtain a license that will serve as a guarantee in the issues of security of users' assets. These actions aim at preventing possible money laundering, fighting fraud and cyber crime," tells Yelizaveta Beley, a lawyer at Antika Law Firm.

"Naturally, identification procedures go against the anonymity principles of many blockchain platforms. However, judging from the trends, general principles of financial transactions AML/KYC earlier or later will appear in all spheres of settlements. Moreover, the very anonymity principles of many cryptocurrencies may become a thing of the past, as they poorly meet consumers' expectations. A person may be a convinced crypto-anarchist, but when it comes to their family's well-being, the issue of criminal prosecution or the result of a trial will depend on availability of knowledge of who paid whom and how much and in that case the anonymity issue will fall into background," says Serhiy Papernik, Head of Banking and Financial Law Practice at Evris Law Firm.

Lawyers advise to review and amend the draft laws, using the existing global experience. "In order for cryptocurrency to remain within the legal framework, we should not introduce bans on such activity or creation conditions that allow only large players and projects to work," says Beley. She offers to support positions of the European Court that recognized bitcoin transactions as payment transactions with currencies, coins and banknotes and ruled that they are not subject to VAT taxation and also recommended all EU member countries to exempt cryptocurrency from the VAT. "We need to draw a clear line between the users of the virtual currency the requirements will not apply to, for instance for registration, licensing, record keeping and administrators and exchanges, whose activity implies rendering services of 'movement of money'," Beley suggests.

"It is not enough to recognize a cryptocurrency legal and say that it can be a 'means of exchange' and 'property' in our legal framework. An entirely new object of law (crypto asset, digital asset, cryptocurrency) needs to be introduced to the civil law and the obligations that could result from such object need to be built from that," says Papernik. He believes that is incomplete legal regulation is allowed, the loopholes in the laws will result into negative court rulings that will harm players of the cryptocurrency market.

Text: Viktoria Rudenko

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